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Revenue Procedure Provides Liberal Relief for Late S Corp. Elections

On
Wednesday, the IRS consolidated the provisions of a number of
previous revenue procedures for requesting relief for late S
elections under Sec. 1362, late qualified subchapter S trust
(QSST) elections, late electing small business trust (ESBT)
elections, late qualified subchapter S subsidiary (QSub)
elections, and late corporate classification elections (Rev.
Proc. 2013-30). The new procedure is now the exclusive
simplified method for taxpayers to apply for relief for these
late elections.

In general, the revenue procedure
expands the time for requesting relief for these late
elections to 3 years and 75 days after the date the election
was intended to be effective. However, for a simple late S
election request, if certain requirements are met, there is no
deadline for requesting relief. Taxpayers that do not qualify
for this simplified relief must submit a request for a letter
ruling and pay a user fee.

The revenue procedure
contains general requirements for all the different elections
within its scope, as well as specific requirements for each
type of election. Among the general requirements is that the
requesting entity must file a reasonable cause/inadvertence
statement that is signed under penalties of perjury describing
its reasonable cause for failing to timely file the S election
on Form 2553, Election by a Small Business Corporation,
or QSub election on Form 8869, Qualified Subchapter S
Subsidiary Election, or that the failure to file the
QSST or ESBT election was inadvertent and describing its
diligence in correcting the errors after they were discovered.
These statements must be attached to the applicable election
form, and the election form must contain the statement, “Filed
pursuant to Rev. Proc. 2013-30” at the top.

Under the
new procedure, S corporations that meet the following
requirements are not subject to the three-year, 75-day
deadline, but instead have no time limit on requesting
relief:

The corporation is not seeking a late
corporate entity classification election;

The
corporation fails to qualify as an S corporation solely
because Form 2553 was not timely filed;

The
corporation and all of its shareholders reported their
income consistent with S corporation status for the year the
election should have been made and all later years;

At least six months have passed since the corporation
filed its first S corporation year tax return;

The IRS did not notify the corporation and the
shareholders of any problem with the S corporation status
within six months after the return was filed; and

The completed election form includes statements from all
shareholders from the date the election was to have been
effective to the date of the filing stating that they have
reported their income consistent with S corporation status.

The new rules are effective Sept. 3, the date
they will be published in the Internal Revenue
Bulletin, but they apply to requests pending on that date
as well as requests received afterward.

Taxpayers that
have ruling requests pending that they would like to withdraw
to take advantage of the revenue procedure (and receive a
refund of their user fees) have until the earlier of Oct. 18
or the date the ruling is issued to notify the national office
that it will rely on the revenue procedure and withdraw the
ruling request.

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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